Fresh Off Streak, Bill Miller Thinks U.S. Stocks Are Cheap

The usual "we-beat-the-markets-again" party was missing this year from Bill Miller's calendar. But the mutual-fund manager -- whose $19.4 billion-in-assets Legg Mason Value Trust fund finally failed to beat the Standard & Poor's 500-stock index last year, ending a 15-year streak -- says he is more optimistic now about U.S. shares than he has been in the past two years.

"The stock market is still cheap," Mr. Miller says. Mr. Miller argues that the stock market, especially large companies, is worth about 20% more than its current trading levels. The market and the economy appear to be firing on all cylinders, he says: Corporate earnings are strong, interest rates are steady, merger-and-acquisition activity is booming, and commodities prices are falling from overheated levels.

He attributes investors' reluctance toward U.S. stocks right now partly to the market psychology of the past half-decade or so. Research suggests that investors feel the pain of a loss twice as much as they feel the pleasure of a gain, says Mr. Miller, who is a student of this kind of research as it pertains to market behavior. In the past five or six years, bonds have provided safety and decent returns, whereas stocks had three years of negative returns following the technology-stock crash of 2000-01.

"Everybody loves bonds because of what bonds did recently," he says.

One of his concerns in the coming year is whether in some cases private-equity groups are buying public companies at prices that are too low, shortchanging existing investors.

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